Cov-Lite Leveraged Loans Raise Concern

The sheer volume of increasingly cov-lite leveraged loans being repackaged and sold as CLOs is starting to raise concern in a rising rate environment. Approximately 50% of corporate debt issuance in the US is now in the form of highly leveraged loans (defined as 5.0x EBITDA). There are also a growing number of mutual funds and ETFs that purchase these loans, which makes the exposure difficult to track (bank loan funds have tripled since 2008).

The article has an ominous conclusion, citing how the Bank of International Settlements believes it will all unfold:

“Mark-to-market losses could spur fund redemptions, induce fire sales and further depress prices. These dynamics may affect not only investors holding these loans, but also the broader economy by blocking the flow of funds to the leveraged credit market.”

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Source: Colby Smith | "Warnings mount for leveraged-loan market" | The Financial Times | 10/19/2018 | Visit